State Bar of Arizona Ethics Opinions

06-01: Sale of Law Practice; Communication; Confidentiality; Covenants/Restrictions on Right to Practice
4/2006

A lawyer seeking to sell his or her solo law practice may disclose limited client-specific information to the prospective lawyer-buyer without client consent to the disclosure.

The selling lawyer must sell at least an entire legal area of practice throughout the geographic area or areas where that practice is being conducted. After the sale, the selling lawyer may be able to resume practicing law, depending on what part of the lawyer’s law practice was sold.

The selling lawyer may not seek through contractual provisions to avoid prohibitions in the Ethical Rules on his or her ability to practice law after the sale. Nonetheless, the parties may negotiate a covenant not to compete and/or a covenant not to solicit within the sale contract.

The selling lawyer may supplement his or her notice of sale to clients with additional information as long as the notice at least meets the requirements of ER 1.17.



FACTS [1]

The inquiring lawyer is preparing to sell his solo law practice to another lawyer. No specific facts regarding the proposed sale are provided.

QUESTIONS PRESENTED

1. May the inquiring lawyer (seller) provide, without disclosure to or consent from his or her clients, the clients’ names, the type of legal projects completed for each client, fees collected during the past three years from each client, and legal practice tax returns and financial statements or those portions of the tax returns and financial statements relating to the part of the practice to be sold?

2. May the sale of the practice be limited to a geographic area less than the entire state of Arizona, such as specified counties?
 
3. After selling the practice, may the selling lawyer continue in private law practice?

4. May the parties, in the sales contract, waive any restriction on the selling lawyer’s ability to resume the private practice of law?

5. May the sales contract include covenants not to compete or covenants not to solicit restricting the selling lawyer?

6. May the notice required by ER 1.17(c) include information in addition to that required by the rule?

RELEVANT ETHICAL RULES

ER 1.0 Terminology

(e) "Informed consent" denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.

ER 1.4 Communication

(a) A lawyer shall:

(1) promptly inform the client of any decision or circumstance with respect to which the client's informed consent, as defined in ER 1.0(e), is required by these Rules;

. . . .

(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

ER 1.6 Confidentiality of Information

(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted or required by paragraphs (b), (c) or (d), or ER 3.3(a)(3).

ER 1.17 Sale of Law Practice

A lawyer or a law firm may sell or purchase a law practice, or an area of law practice, including good will, if the following conditions are satisfied:

(a) The seller ceases to engage in the private practice of law, or in the area of practice that has been sold, in the geographic area(s) in which the practice has been conducted;

(b) The entire practice, or the entire area of practice, is sold to one or more lawyers or law firms;

(c) The seller gives written notice to each of the seller's clients regarding:

(1) the proposed sale;

(2) the client's right to retain other counsel or to take possession of the file; and

(3) the fact that the client's consent to the transfer of the client's files will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of receipt of the notice.

If a client cannot be given notice, the representation of that client may be transferred to the purchaser only upon entry of an order so authorizing by a court having jurisdiction. The seller may disclose to the court in camera information relating to the representation only to the extent necessary to obtain an order authorizing the transfer of a file.

(d) The fees charged clients shall not be increased by reason of the sale.

ER 5.6 Restrictions on Right to Practice

A lawyer shall not participate in offering or making:

(a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement;

RELEVANT ARIZONA ETHICS OPINIONS

Ariz. Ethics Ops. 2001-01, 92-08, 90-06

OPINION

The inquiring lawyer poses several questions about selling a private solo law practice. The questions necessarily require interpreting ER 1.17, which the Arizona Supreme Court adopted effective December 1, 2003. With one exception noted below, the Court adopted the American Bar Association’s Model Rule 1.17, as amended in 2002, verbatim.

The sale of a law practice is not analogous to other business sales, as “[t]he practice of law is a profession, not merely a business. Clients are not commodities that can be purchased and sold at will.” ER 1.17 cmt. 1. In fact, until Model Rule 1.17 was adopted, “it was generally considered unethical to sell a law practice.” ABA Annotated Model Rules of Professional Conduct (5th ed. 2003) at 280. Ariz. Ethics Op. 92-08 affirmed the then-prevailing view that “it is ethically improper for an lawyer to sell anything other than the physical assets and accounts receivable of his or her law practice.” Op. 92-08 at 2. [2]

Question 1: May the inquiring lawyer (seller) provide, without disclosure to or consent from his or her clients, the client names, the type of legal projects completed for each client, fees collected during the past three years from each client, and legal practice tax returns and financial statements or those portions of the tax returns and financial statements relating to the part of the practice to be sold?

This information falls into two categories: client-specific information and general business information.

1. Client-specific information

ER 1.6 ordinarily would protect from disclosure the client-specific information the inquiring lawyer seeks to provide to the buying lawyer. That rule “prohibits a lawyer from disclosing any ‘information relating to the representation of a client….’ The range of protected information is extremely broad, covering information received from the client or other sources, and even information not in itself protected, but that may lead to the discovery of protected information by a third party.” ABA Annotated Model Rules, supra, at 88.

As a result, comment 7 to ER 1.17, on the surface, would seem dispositive:

Providing the purchaser with access to client-specific information relating to the representation and to the file, however, requires client consent. The Rule provides that before such information can be disclosed by the seller to the purchaser the client must be given actual written notice of the contemplated sale, including the identity of the purchaser, and must be told that the decision to consent or make other arrangements must be made within 90 days.

However, ER 1.17 was specifically intended to authorize lawyers to sell their legal practices so long as they meet certain requirements. To prevent lawyers from disclosing his or her clients’ identities, for conflicts purposes, and a high-level, general description of the work done for each (e.g. tax advice, business litigation) would thwart the rule’s very purpose. This minimal information would be key to preliminary negotiations. As a practical matter, no reasonable lawyer would agree to pursue serious negotiations to buy another lawyer’s law practice without this minimal information. Conceivably, the prospective selling lawyer could ask his or her clients for consent to disclose such information. But no reasonable lawyer would make such a request at a preliminary stage of negotiating a sale because it would jeopardize his or her ability to retain the clients if the preliminary negotiations were unsuccessful.

The sentence in the comment immediately preceding the one quoted above supports this conclusion, albeit inartfully:

Negotiations between seller and prospective purchaser prior to disclosure of information relating to a specific representation of an identifiable client no more violate the confidentiality provisions of ER 1.6 than do preliminary discussions concerning the possible association of another lawyer or mergers between firms, with respect to which client consent is not required.

ER 1.17 cmt. 7. See also ABA/BNA Lawyers’ Manual on Professional Conduct 91:902 to 91:903 (1999) (“the compelling need to protect clients from conflicts of interest arguably provides a rationale for limited disclosure of client information in the context of serious merger negotiations”). If two law firms contemplating a merger do not need client consent to exchange basic, minimal information, such as client names to check for conflicts, then a lawyer negotiating to sell his or her solo law practice may provide similar minimal information to the prospective purchasing lawyer.

Although the selling lawyer may disclose client identities and high-level, general descriptions of the work performed, the fees paid by the specific clients over the past three years do not fall into the category of minimal necessary information. The revenue stream provided by each specific client does not facilitate the sale of a law practice.

This interpretation of ER 1.17 – that the selling lawyer may disclose without client consent client identities and high-level, general descriptions of the work performed – comes with a caveat. If there is a reasonable prospect that disclosing such information will adversely affect a client’s material interest or the client has given the selling lawyer instructions not to disclose such information, then the selling lawyer may not reveal the information without client consent.

Finally, the selling lawyer’s ability to release minimal information without client consent to a prospective purchaser necessarily imposes a corresponding duty on the prospective purchaser to keep that information confidential. If the sale is consummated properly under ER 1.17, the buyer then becomes lawyer for the seller’s clients, with all the attendant obligations under ER 1.6. The problem arises if the selling lawyer has disclosed client names and high-level, general descriptions of the legal work, but the preliminary negotiations do not result in a sale agreement. In that situation, the former prospective purchaser has an obligation to keep the information confidential. [3]

2. General business information

The second type of information the inquiring lawyer seeks to disclose to a prospective purchaser is the lawyer’s legal practice tax returns and financial statements or those portions of the tax returns and financial statements relating to the part of the practice to be sold. Assuming this information does not identify specific clients, we do not believe sharing it with the prospective purchaser implicates ER 1.6 or ER 1.17.

Question 2: May the sale of the practice be limited to a geographic area less than the entire state of Arizona, such as specified counties?

As noted above, our Supreme Court adopted Model Rule 1.17 almost verbatim. The fact that the Supreme Court did not adopt Model Rule 1.17 verbatim, however, does not mean that the Supreme Court substantively changed the model rule. Rather, the Supreme Court customized Model Rule 1.17, an option given in the Model Rule itself:

A lawyer or a law firm may sell or purchase a law practice, or an area of law practice, including good will, if the following conditions are satisfied:

(a) The seller ceases to engage in the private practice of law, or in the area of practice that has been sold, [in the geographic area] [in the jurisdiction] (a jurisdiction may elect either version) in which the practice has been conducted….

(Emphasis added.) Arizona opted for the geographic language, specifically requiring the seller to cease “to engage in the private practice of law, or in the area of practice that has been sold, in the geographic area(s) in which the practice has been conducted….” ER 1.17(a) (emphasis added).

What constitutes a “geographic area” is, therefore, critical to answering the inquiring lawyer’s question. Comment 4 to ER 1.17 provides some perspective:

The Rule permits a sale of an entire practice attendant upon retirement from the private practice of law within the jurisdiction. Its provisions, therefore, accommodate the lawyer who sells the practice on the occasion of moving to another state. Some states are so large that a move from one locale therein to another is tantamount to leaving the jurisdiction in which the lawyer has engaged in the practice of law. To also accommodate lawyers so situated, states may permit the sale of the practice when the lawyer leaves the geographical area rather than the jurisdiction.

The rule appears to contemplate a state having multiple jurisdictions. By the very language our Court used in customizing ER 1.17(a), it also appears that our state may comprise multiple “geographic area(s).” We thus conclude that Arizona’s version of ER 1.17(a) contemplates that a lawyer’s practice may be in a geographic area – or in geographic areas – that constitute less than the entire state.

Under the specific facts of each sales transaction, a lawyer’s practice possibly may be contained in a geographic area that generally fits within a specific county or counties. However, whether one county or multiple counties constitute a particular geographic area or geographic areas depends on the specifics of each selling lawyer’s practice. ER 1.17(a) does not allow the selling lawyer to arbitrarily designate specific counties as part of the “geographic area(s)” or to sell his or her practice in specific counties.

Question 3: After selling the practice, may the selling lawyer continue in private law practice?

Under ER 1.17, the selling lawyer must withdraw from the specific legal area of practice that was sold throughout the entire geographic area or areas in which that law practice was conducted. Comment 6 to ER 1.17 points out that the rule “requires that the seller’s entire practice, or an entire area of practice, be sold.” If a lawyer may sell just an entire area of practice – not his or her entire practice – then the rule contemplates that the lawyer may continue in private practice, just not in the area of practice sold and in the geographic area or areas in which that sold area of practice was located.

As a result, the selling lawyer may continue the private practice of law so long as the legal area of practice is different from that which was sold and so long as the lawyer does not practice in the same “geographic area(s).”

Question 4: May the parties, in the sales contract, waive any restriction on the selling lawyer’s ability to resume the private practice of law?

The parties may not waive any restriction on the selling lawyer’s ability to resume the private practice of law. An Arizona lawyer is obligated to comply with Arizona’s legal ethics rules. See Rule 41(a), Ariz.R.S.Ct. (“The duties and obligations of members shall be…[t]hose prescribed by the Arizona Rules of Professional Conduct adopted as rule 42 of these rules”).

The ethical restrictions on the selling lawyer’s ability to resume the private practice of law may not be waived or superceded by a contract of sale.

Question 5: May the sales contract include covenants not to compete or covenants not to solicit restricting the selling lawyer?

At first glance, ER 5.6 appears to prohibit any restriction on the buying lawyer’s right to practice. Comment 1 to ER 5.6, in fact, addresses the public policy against restricting a lawyer’s right to practice law:

An agreement restricting the right of lawyers to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer.

However, comment 3 to that same rule provides that the rule does not prohibit restrictions that may be included in the terms of the sale of a law practice pursuant to ER 1.17.

Other jurisdictions have allowed restrictions on the practice of law. See, e.g., Hicklin v. O’Brien, 138 N.E.2d 47 (Ill. App. 1956) (restriction contained within a purchase contract was not an illegal restraint of trade as applied to keep the seller of a law practice from practicing within a specific county); South Carolina Rules of Professional Conduct, Rule 1.17(c) (“The agreement for the sale of a law practice may include reasonable restrictions on the seller’s right to practice without violating Rule 5.6”).

This public policy has been further stated in the context of employment, partnership agreements, and settlements. Ariz. Ethics Op. No 2001-01 concluded that it is unethical for a lawyer to enter an indigent criminal defense contract that contains a provision that prevents the lawyer from representing defendant clients in related civil matters adverse to the contracting governmental entity. Ariz. Ethics Op. No. 90-06 concluded that a lawyer may enter an agreement that includes a restriction on the lawyer’s right to practice.

Our Supreme Court addressed the public policy concerns regarding covenants not to compete in the medical profession in Valley Medical Specialists v. Farber, 194 Ariz. 363, 982 P.2d 1277 (1999). In that case, the Court found an analogous public-policy interest between access to physicians and access to lawyers, stating, “Restrictive covenants between lawyers limit not only their professional autonomy but also the client's freedom to choose a lawyer.” Id. at 369, 982 P.2d at 1283.

Farber and the two ethics opinions may be distinguished from the present matter by the relative position of the parties entering the covenant. The restriction to practice was imposed against the subordinate party to the covenant in each circumstance where covenants were prohibited. Even in Farber, the Court stated that, “Although this agreement is between partners, it is more analogous to an employer-employee agreement than a sale of a business.” Id. at 368, 982 P.2d at 1282.

Farber made the reasonableness of the covenant a critical component of the analysis.  In this matter, the inquiring lawyer has not provided any facts on this subject.

Based on the distinction between the sale of a law practice and other circumstances in which covenants may arise, the selling and buying lawyers may ethically negotiate covenants restricting their ability to practice law within the contract of sale. A fact-specific analysis of such covenants is necessary to determine their reasonableness.

Question 6: May the notice required by ER 1.17(c) include information in addition to that required by the rule?

The inquiring lawyer specifically asks whether the notice may include the selling lawyer’s reason for selling the practice; the reasons the selling lawyer has selected a particular purchasing lawyer; the selling lawyer’s recommendation that the client agree to the sale; and acceptance and approval of the notice and prospective sale by signature of the selling and purchasing lawyer.

ER 1.17(c) does not specify a form of notice to clients but rather the minimum necessary elements that the notice of a prospective sale must contain: the fact of the proposed sale; the client’s right to retain other counsel or to take possession of the file; and that the client's consent to the transfer of the client's files will be presumed if the client does not take any action or does not otherwise object within 90 days of receipt of the notice.

At least on the surface, more information normally would be best. ER 1.4 imposes a liberal standard of communication:

(c) A lawyer shall:

(1) promptly inform the client of any decision or circumstance with respect to which the client's informed consent, as defined in ER 1.0(e), is required by these Rules;

. . . .

(d) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

The inquiring lawyer’s question reveals a tension between the client’s and lawyer’s interests. By the time the lawyer sends the notice required by ER 1.17(c), the lawyer has a personal interest in the underlying business deal to sell his or her law practice. The lawyer wants to consummate the sale. Providing the notice required by ER 1.17(c) should not become a vehicle for the selling lawyer to market or promote the sale (and his or her personal interests) to the clients.

The selling lawyer may supplement the notice of sale required by ER 1.17(c) with information such as the selling lawyer’s reason for selling the practice; the reasons the selling lawyer has selected a particular purchasing lawyer; the selling lawyer’s recommendation that the client agree to the sale; and acceptance and approval of the notice and prospective sale by signature of the selling and purchasing lawyer. We caution lawyers, however, not to use the ER 1.17(c) notice as a platform for promoting his or her personal interests in seeing the sale consummated.

CONCLUSION

A lawyer who seeks to sell his or her solo law practice may disclose client identities and high-level, general descriptions of the work performed without client consent, unless there is a reasonable prospect that disclosing this information will adversely affect a client’s material interest or the client has given the selling lawyer instructions not to disclose such information. A lawyer may not disclose, without client consent, the fees paid by the specific clients over the past three years.

A lawyer may disclose his or her law practice tax returns and financial statements or those portions of the tax returns and financial statements relating to the part of the practice to be sold, assuming this information does not identify specific clients.

The selling lawyer may continue the private practice of law so long as the legal area of practice is different from that which was sold and so long as the lawyer does not practice in the same “geographic area(s).”

The selling lawyer may not seek through contractual provisions to avoid prohibitions stated in the Ethical Rules on his or her ability to practice law after the sale. Nonetheless, the selling lawyer may negotiate a covenant not to compete and/or covenant not to solicit within the contract of sale.

Finally, the selling lawyer may supplement the notice of sale to clients with additional information as long as the notice meets the requirement of ER 1.17. A lawyer may not use the notice required by ER 1.17(c), however, to promote his or her own personal interests in seeing the sale consummated.
____

[1] Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.  (c) State Bar of Arizona 2006

[2] The adoption of ER 1.17 effectively invalidates Op. 92-08.

[3] Possessing that confidential information may impact the former prospective purchaser’s obligation to avoid conflicts of interest. That issue is beyond the scope of this inquiry.